February jobs data will be the data highlight; Fed Chair Powell did not sound very concerned at yesterday’s appearance; adding fuel to the fire, Powell said that the Fed was focused on more than just bond yields
UK Chancellor Sunak faces backlash to his planned corporate tax hike from within his own party; Germany reported solid January factory orders; Italy moved to block shipments of the AstraZeneca vaccine to Australia; Russia reports February CPI
BOJ Governor Kuroda signaled there would be no change to its YCC policy; the annual session of the National People’s Congress began today in Beijing; OPEC+ confounded market expectations and agreed to hold output steady in April
The dollar continues to gain ahead of the jobs data. At this point, the move has taken on a life of its own and we’re not sure today’s data will have much impact on the dollar. DXY is trading at the highest level since November 30 near 92 and is on track to test the November 23 high near 92.80. The euro remains heavy after the break below the February 5 low near $1.1950, which sets up a test of the November 23 low near $1.18. Sterling remains heavy near $1.38 and a break below that would set up a test of the February 4 low near $1.3565. USD/JPY continues its march higher, trading at the highest level above 108 since last June and on track to test the June 5 high near 109.85.
February jobs data will be the data highlight. Consensus sees 198k jobs added vs. 49k in January, with unemployment steady at 6.3%. Both average hourly earnings and average weekly hours are expected to fall a tick to 5.3% y/y and 34.9 hours, respectively. So far, the clues to the job number have been mixed. The final one came yesterday as emergency continuing claims were reported down nearly 1 mln for the BLS survey week. As a result, total continuing claims for that week stood at 16.6 mln, the lowest since mid-January. Whatever the number is, markets are still focusing on $1.9 trln of stimulus coming as well as an ultra-dovish Fed. This means the US economic outlook remains strong and that favors equities and the dollar at the likely expense of US Treasuries. January trade (-$67.5 bln expected) and consumer credit ($12.0 bln expected) will also be reported. Elsewhere, Canada reports January trade and February Ivey PMI.
Fed Chair Powell did not sound very concerned at yesterday’s appearance. The negative market reaction clearly expressed disappointment that he didn’t push back harder against rising yields. He admitted that the recent run-up “was something that was notable and caught my attention,” adding that “I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals.” By saying he "would be" concerned about tighter financial conditions, it implies that we're not there yet. As a result, the bond market got another green light to sell the long end.
Adding fuel to the fire, Powell said that the Fed was focused on more than just bond yields. Rather, he said the Fed looks at financial conditions more broadly and noted “Financial conditions are highly accommodative and that’s appropriate given the ground the economy has to cover. If conditions do change materially, the committee is prepared to use the tools that is has to foster the achievement of its goals.” That is an implicit promise to act if financial conditions tighten too much, and that is exactly what we are likely to get in the coming days. Besides higher bond yields, we also saw equities sell off. Spread product has held up fairly well but it’s only a matter of time before they widen.
US yields jumped. The 10-year yield is trading at 1.55% and is approaching last week’s high near 1.61%, while the 30-year yield is trading at 2.30% and is approaching last week’s high near 2.39%. The 3-month to 10-year curve has steepened to a new cycle high near 152 bp and is approaching the January 2017 high near 202 bp, while the 2- to 10-year curve has steepened to a new cycle high near 141 bp and is approaching the July 2015 high near 178 bp.
The Fed’s Bostic speaks today. At midnight, the media embargo goes into effect and there will be no more Fed speakers until Chair Powell’s post-decision press conference March 17. In a sense, the US Treasury market (and by extension global financial Markets) will be flying blind in terms of official guidance for the next couple of weeks.
To make matters worse, we also have February US inflation data reported next week that will surely test the bond market. Most measures of CPI and PPI are expected to accelerate sharply in February and this is even before the pandemic base effects kick in for March, April, and May. Of note, headline CPI is expected to rise 1.7% y/y vs. 1.4$ in January, headline PPI is expected to rise 2.6% y/y vs. 1.7% in January, and core PPI is expected to rise 2.5% y/y vs. 2.0% in January. Yes, this will be spun by the Fed as transitory. The question is, will the bond market believe the Fed?
UK Chancellor Sunak faces backlash to his planned corporate tax hike from within his own party. Unidentified Tory MPs say many are unhappy with the move and will reportedly push to cancel it if the economy improves over the next two years. Sunak defended his plan and downplayed the notion that past corporate tax cuts had boosted revenue. Instead, he noted that most of the revenue increase came from the “cyclical recovery in corporate profits” after the financial crisis.
Germany reported solid January factory orders. They rose 1.4% m/m, nearly triple the expected 0.5% m/m. However, December was revised to -2.2% m/m from -1.9% previously. Orders are likely benefiting from stronger global growth, but domestic activity such as retail sales remain depressed. With reopening dragging on in Germany, we expect little improvement to the economic outlook until Q2 at the earliest. And it’s not just Germany, as Italy just reported a -3.0% m/m drop in January retail sales vs. -0.5% expected.
Italy moved to block shipments of the AstraZeneca vaccine to Australia. The Foreign Ministry said the decision blocking 250,700 doses was taken because of continued vaccine scarcity in Europe and Italy, due in part to supply delays. Italy also noted that Australia is considered a “non-vulnerable” country. The so-called export transparency mechanism allows this but requires member countries to inform the European Commission of their decisions to block such shipments. The EC did not oppose Italy’s decision. Prime Minister Draghi signaled a tougher approach towards pharma companies that aren’t meeting their delivery commitments. While largely symbolic, the blockage nevertheless sends a worrisome signal that countries are moving towards a more selfish approach. Italy’s move was the first under the new mechanism and we doubt it will be the last. It also underscores just how badly Europe is lagging the US in terms of vaccinations, another reason we favor the US outlook and the dollar.
Russia reports February CPI. Headline inflation is expected at 5.5% y/y vs. 5.2% in January. If so, it would be the highest since November 2016 and move further above the 4% target. Governor Nabiullina has signaled that the easing cycle is over and has started to talk about the possibility of tightening this year. Next policy meeting is March 19 and rates are expected to remain steady at 4.25%.
Bank of Japan Governor Kuroda signaled there would be no change to its YCC policy. Responding to question of whether the bank would allow more flexibility in the 10-year yield around its 0% target, Kuroda said “Personally I believe it’s neither necessary nor appropriate to expand the band. There’s no change in the importance of keeping the yield curve stable at a lower level.” He added that the bank wants to keep the entire yield curve low as the economy recovers from the pandemic. It was clear to us that the BOJ would not widen the target ban of +/- 20 bp around 0% at during a period of rising yields worldwide, as that would simply invite trouble. Not surprisingly, JGB yields fell across the curve in response. We are even more confident now that the BOJ will deliver very little of substance from its policy review at its Marc 16-17 meeting. That said, policymakers will be very happy with the current bout of yen weakness and will do what it can to keep that going.
The annual session of the National People’s Congress began today in Beijing. It is expected to run shorter than its usual two weeks due to the pandemic. Premier Li kicked things off with his so-called Work Report, equivalent to the State of the Union address here in the US. The key takeaway was the lower than expected growth target for this year of “above 6%.” This compares to the Bloomberg consensus forecast of 8.4% growth this year and the IMF forecast of 8.1%. This suggests that policymakers are prepared to sacrifice some growth this year in order to rebalance the economy, reduce leverage, and further structural reforms. Indeed, Li said “A target of over 6% will enable all of us to devote full energy to promoting reform, innovation, and high-quality development.” This also supports our view that the PBOC is looking to normalize policy in the coming months.
COMMODITIES AND ALTERNATIVE INVESTMENTS
OPEC+ confounded market expectations and agreed to hold output steady in April. It appears Saudi Arabia won out in the end, although Russia and Kazakhstan were granted small increases in output of 130k and 20k bbl/day, respectively. Oil prices continue their surge today, adding to market concerns about inflation and feeding into the steepening yield curves worldwide. Next OPEC+ meeting is scheduled for April 1 and will decide May output.